Opinion: Unchain debate on Social Security benefits

Social Security cards are shown in a file photo.Bumper DeJesus/The Star-Ledger

By Steven Pressman

A heated debate is raging under the public radar. It involves Social Security benefits (on average, $1,230 is paid each month to nearly 54 million Americans) and how much they should be increased annually. The debate is about whether we should cut benefits to Social Security recipients. Originally, Social Security benefits were a fixed dollar amount, determined at the time people retired (although Congress periodically gave retirees a benefit hike). Since 1973, Social Security recipients began receiving cost-of-living adjustments every January. Benefits rise automatically to compensate for inflation over the previous year.

The job of measuring inflation falls to the Bureau of Labor Statistics, which uses a two-step process. It finds out what a typical family buys during the course of a month, and then determines its cost.

Inflation is the percentage change in the cost of this “market basket” of goods. It measures how much more money is needed to buy the same exact things over time.

Of course, no one buys the same goods all the time. The market basket’s contents change as people age, as technology changes and as prices fluctuate. The current debate about using a chained inflation index for adjusting Social Security benefits concerns how price changes affect the things that people buy.

I may eat an apple every day, so my monthly market basket of goods would include 30 apples. However, if the price of apples soared, I might choose to buy fewer (if any) apples and consume other, less expensive, fruit instead.

Using a fixed market basket of goods assumes I continue to buy 30 apples — even after its price goes through the roof. The alternative, a “chain-weighted” inflation index, averages my spending on apples both before and after the price increase. It lowers my inflation rate, because it lowers how much I buy of those things that increase most in price.

Calculated at the national level, a chained index would reduce estimated inflation and would reduce cost-of-living adjustments to Social Security beneficiaries by approximately three-tenths of one percentage point, or nearly $50 per year on average.

While this may seem like a trivial amount, small annual differences do add up. Using a chained inflation index for Social Security would lower benefits nearly 5 percent after one decade. Those who live into their 80s (disproportionately women) would suffer the most. Their benefits would be effectively reduced 10 percent.

Using a chained inflation index is usually justified as necessary to maintain the solvency of Social Security and also to accurately increase benefits to coincide with inflation.

Both of these claims are erroneous.

The U.S. Social Security retirement program faces only minor financial problems over the next half-century. Projected deficits are small and manageable, and they disappear if the economy performs well and jobs are plentiful.

Even small deficits can be eliminated by taxing wage income that some taxpayers disguise as other types of income to escape taxation. This is a much better solution than cutting benefits for the elderly, nearly half of whom rely on Social Security to stay out of poverty.

There is also a problem with the view that we measure inflation more accurately with a chained index. Elderly households spend a great deal on medical care. Other than education, nothing has increased in cost as much as health care over the past several decades.

If accuracy demands a chained index, it also demands an inflation measure based on the actual spending of retirees.

Such a measure exists. The CPI-E (consumer price index for the elderly) looks at inflation based on the market basket of goods bought by elderly households. It includes relatively more spending on medical care than average households, and less spending on clothing, alcohol and entertainment (Lady Gaga music downloads). With this measure, inflation for elderly households turns out to be approximately three-tenths of a percentage point higher than inflation for other households. Together, chained weights and the CPI-E balance each other out. A chained index alone doesn’t result in greater accuracy; all it does is reduce annual cost-of-living adjustments to elderly Americans.

But there is an even stronger case against using a chained inflation index. Contrary to what many politicians and pundits claim, Social Security is not an entitlement program. It is a government insurance program.

Retirement benefits were promised to people who paid into the system while they were working. Changing the rules at a much later date, when it is difficult for beneficiaries to earn additional money, is cruel and unconscionable punishment. Suppose your home burned down and your insurance company said that you will get only 90 percent of what it promised when you paid your premiums. You would likely contact your elected representatives and seek legal advice. Our government should not behave this way — reneging on the promises made to its citizens.

Social Security has been a great American success story. Let’s not ruin it because some people seem chained to a bunch of erroneous beliefs.

Steven Pressman is professor of economics and finance at Monmouth University and the author of “50 Major Economists,” 3rd ed.